Wednesday, June 12, 2024
Money TalksFast depreciating Birr propels cost of production

Fast depreciating Birr propels cost of production

At the end of every report done by the International Monetary Fund (IMF) about Ethiopia, it is normal to find a statement calling for further flexibility in the exchange rate regime of the country. Officials of the IMF have a firm position that the overvaluation of Birr is the major reason why Ethiopia’s export proceeds are not growing and the country is experiencing a foreign currency shortage. They believe the fast depreciating Birr, a prerequisite put to access loans from the IMF, would help Ethiopia boost exports, while it reduces its imports.

Arguably, the depreciation has brought some changes. It played a big role in raising export proceeds from USD three billion to USD 3.6 billion in the last three years while curbing the growth of imports, which averaged USD 13.8 billion, during the same period. But this comes at a cost. With inflationary pressure being its most evident impact, the depreciation has also impacted the manufacturing sector severely. Even though it was supposed to encourage local production, the value of the fast falling Birr against major foreign currencies led to a surge in cost of production.

“The cost of producing an item is now at a historic-high, an economic outcome caused by the ill-advised depreciation policy of the government,” said Befikadu Degfe, Professor of Economics, known for his economic analysis during the active days of the Ethiopian Economics Association in the early 2000s. His assertions downplay the IMF’s claim that depreciation is the ultimate solution to increase forex earnings from export of goods.

Many in the manufacturing sector concur with Befikadu’s view. As the value of Birr depreciated by 23 percent against the dollar every year, with the figure reaching 10 to 20 percentage points higher in the cases of the GBP and the Euro, the cost of producing an item across manufacturing plants saw similar upsurges, if not, more.

Majority of manufacturers in Ethiopia get inputs from abroad. The fast depreciation of Birr has meant more money is needed to import these items. In short, a textile company that was importing 10 zippers with 23 Birr or USD one three years ago, now requires 50 Birr to do the same. A metal factory that was procuring a ton of billet for 14,000 birr or USD 600 in 2018 must now pay twice as much even if the product shows no change in the international market. Of course, the rationale behind it is to make imports expensive. But that only seems to be a right move if the high-priced good is produced locally and has little importance for locals.

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According to industry insiders, in case of Ethiopia, where from cottage industries to big manufacturing plants are dependent on foreign suppliers to get inputs, depreciation would only increase the cost of production.

Established 15 years ago, Eltex is among the few successful garment factories that stayed in the manufacturing business for over two decades. Started as a cottage industry with only 12 employees, the company now owns two plants in Kality and Bishoftu with a registered capital of over 70 million birr, creating job opportunities for almost 1,400 employees. With regards to the depreciation, it has brought mixed results for the company. Even though the exchange rate adjustment brought more export income for Eltex, it also made the cost of producing items expensive.

“It has drastically increased our need for working capital, which is not easily accessible. Though a controlled level of depreciation would have helped us boost export proceeds, its strong pace has increased the cost of inputs, which we cannot offset with the higher earnings we have made from exports,” said Elias Tesfaye, General Manager, founder and owner of Eltex, which secures an average of USD 2.5 million in export proceeds yearly. “We are now utilizing less than half of our production capacity because of input shortages due to the surge in cost of production and shortage of forex,” said Elias.

Manufacturers in the food market have also felt the pinch, in particular, businesses involved in the edible oil market are experiencing a drastic surge in cost of production. With the price of crude edible oil soaring at a higher rate than the figure registered in recent years, the fall in value of the local currency increased their spending to buy foreign currencies. Though the businesses do not hesitate to pay any amount of money to secure the forex, doing so requires paying high-interest loans, a situation which industry insiders cite as a discouraging factor for edible oil producers to utilize their production capacity to the fullest.

“As almost all refinery plants of edible oil are import dependent, the depreciation directly impacts their operations and even discourages them from utilizing their full capacity, which was not supposed to happen considering the shortage of edible oil in the market,” said Addise Garkabo, General Manager of Edible Oil Manufacturing Industries Association, who believes the government needs to slowdown the daily exchange rate adjustment considering its impact on local production and the inflationary pressure.

In its report earlier this year, the Ministry of Trade & Industry admitted the contribution of depreciating birr to inflation, which remained strong at 33 percent last month with food inflation reaching 38.9 percent, almost one percentage point lower than the preceding month. Even though the Ministry of Finance also admitted this, policymakers tend to call the measure an acceptable trade-off or in other words, another bitter pill to swallow.

“The consumer is paying the ultimate price, while the depreciation is becoming a roadblock for the growth of the manufacturing sector,” Addise added.

Befikadu also wants the depreciation to stop. “It looks appealing theoretically, but it only prolongs the suffering of consumers who already had enough,” said Befikadu, urging officials to understand there is no straight link between the value of local currency and exports of goods. It appears few in the policy arena understand his concern, with Birr losing its value at a much higher rate than the past. A single dollar now almost costs 50 birr, a value much lower than the figure registered a year ago. With no explanation given over the continuation of the adjustment, it won’t be long before businesses are asked to pay a 100 birr to buy a single dollar.

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